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Which Airlines Will Survive?

Old 08-18-2009, 05:01 PM
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Question Which Airlines Will Survive?

Not sure if this has been posted? A pretty sobering view on the industry...


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Which Airlines Will Survive?
Tom Van Riper, 08.04.09, 12:00 PM EDT
Another losing quarter, despite painful cutbacks. Consolidation may be the only solution.

How many more seats can the airlines pull from the sky? Apparently not enough to turn the industry around for a sustained period.
The nine largest U.S. airlines--those accounting for about 88% of all domestic traffic--lost a collective $1.5 billion during the recently completed second quarter. This despite per-seat traffic numbers (known in the industry as load factor) flying close to an all-time high, according to Robert Herbst, an independent airline analyst who complies industry statistics on his Web site, airlinefinancials.com.

His prognosis for the third quarter: a 20% or so decline in revenue for most big carriers from the same quarter in 2008, as business and leisure travelers continue to cut back. He predicts the July load factors that airlines are set to announce this week will show that planes were close to 90% full.
"To see this kind of load factor and still lose money is very unusual compared to the industry's history," Herbst says.
The problem? Too many airlines. With the economy already taking a bite out of demand, cutting the supply of seats only goes so far when they're spread among nine major carriers, plus regional competition. The industry is essentially engaged in an ongoing fare war, a tough way to price seats high enough to cover costs. An improving economy, inevitable at some point, figures to push oil prices as much as customer demand. Will carriers ever be able to set prices optimally?
"Not unless you have major restructuring, including consolidation," says Marick Masters, a business professor at Wayne State University who has long followed the industry. In other words, spreading out 88% of the domestic flying public among six airlines would work a lot better than spreading them among nine. Until then, "it's a dim future for as far as we can see in the future."

Herbst estimates that the majors will need to combine cost cuts and revenue increases by at least 15% in order to turn marginal profits while upgrading their aging fleets. The problem, as he sees it, is that most carriers have been through big restructurings either in or outside of bankruptcy, leaving little room for further cost cuts in an industry with a costly infrastructure that includes equipment, terminal rentals and expensive labor.
"Most carriers will cut capacity further, which will reduce some costs, but there are so many fixed costs to cover," he says. Meanwhile, price competition keeps the revenue side challenged.

Herbst does expect most major carriers, including Delta, JetBlue and Air Tran, to squeak out operating profits in 2009. But the razor thin margins offer little cushion against any one-time costs that might pop up. The bulk of the operating losses figure to come from United, American and U.S. Airways, which he predicts finish 2009 a combined $1.7 billion in the red on an operating basis. AMR Corp., American's parent, just privately placed $276 million in debt to finance equipment, on which it will pay 13% interest.
The biggest problems, though, are at U.S. Airways and United, both of which could easily land in bankruptcy in less than a year, both Herbst and Masters believe. Low market caps and a lack of unencumbered assets to borrow against makes raising cash a problem, Herbst notes.
"At least United has strength in its Asia-Pacific routes," he says. "U.S. Airways just has little to offer that you can't find elsewhere." Sounds like a reason to have at least one fewer airline.

In Pictures: Which Airlines Will Survive?
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Old 08-18-2009, 05:41 PM
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Old 08-18-2009, 05:46 PM
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What else is new?
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Old 08-19-2009, 05:12 AM
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If I had a nickel.

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Old 08-19-2009, 08:08 AM
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Originally Posted by Dicecal View Post
What else is new?
Nothing is new; I try to post links to aviation related articles whether good or bad, that's all...
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Old 08-19-2009, 08:34 AM
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Originally Posted by ⌐ AV8OR WANNABE View Post
Nothing is new; I try to post links to aviation related articles whether good or bad, that's all...
I appreciate it.
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Old 08-19-2009, 09:53 AM
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Originally Posted by SebastianDesoto View Post
I appreciate it.
...and I appreciate your avatar!
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Old 08-19-2009, 11:33 AM
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Who is this Herbst guy who keeps getting quoted? His picture is in the corner of his SeekingAlpha.com articles. He's in uniform, looking out of a cockpit window. Is he just an airline pilot who thinks his opinion is more valuable than yours or mine?

The fact that his opinion gets rehashed by other analysts indicates how clueless the industry analysts really are.

Yeah, logic and conventional wisdom indicate that USAirways has used all of it's nine lives. That same logic said they would be gone in 2003...
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Old 08-19-2009, 01:16 PM
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If I'm not mistaken Herbst is a former TWA guy who survived the assimilation by AMR amazingly enough.

He's a less sought after version of Vaughn Cordle because he actually uses facts and figures whereas Cordle just kinda' flings it at the wall and hopes it sticks.

As far as USAirways, I agree that they are on their last and final life (Again).Although never underestimate the stupidity/greed of venture capital types seeking a quick return on their investment like PAR and a few others did in the early days of the HP/US train wreck.

I could see US ending up either selling itself off piecemeal or en masse to AMR and then wait for the explosion as APA and USAPA meet head on at a high rate of speed.
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Old 08-19-2009, 05:56 PM
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I would'nt pay too much attention to the so-called analyst's as they have been wrong in the past and will continue to be wrong in the future .
Just go to work as usual till you get the dreaded phone call in the middle of the night .
That is all.
Just my .02 cents from past experience .


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